Culture andthe Bottom Line

Culture and the Bottom Line

It makes a big difference!

Research shows that organizational culture impacts profitability, ROI, stock price, and competitiveness. Check out this research—it is a great little wake up call for us all. Amazing how valuable organizational culture is, and how long we have known this.

I found this research to be helpful in several ways: first, making the case for culture management; second, what results to shoot for and how high to aim; and third, which aspects of culture are most value adding.

In the landmark study Corporate Culture and Performance documenting results for 207 large U.S. companies in 22 different industries, Kotter and Heskett reported phenomenal differences in the long-term results of companies that “managed” their cultures well, as opposed to those that didn’t. Important finding: firms with cultures that emphasized (i) an outward focus on all the key stakeholder groups (customers, employees, and shareholders), and (ii) leadership from managers at all levels outperformed firms that did not have those traits by a huge margin. Over an eleven-year period, companies that managed their cultures well saw revenue increases of 682%, versus 166% for the companies without these cultural traits; stock price increases of 901%, versus 74%; and net income increases of 756%, versus 1%. Key lesson: it is not enough to have a strong culture, since a bad strong culture can be a hindrance, nor is it enough to have a culture that simply fits your strategy, since strategies change quickly today. Successful organizations need cultures that are strong, fit the strategy, and are, above all, adaptive.1

Denison’s research of 34 large American firms—one of the most frequently cited studies of culture and performance —found that companies with a participative culture reap an ROI that averages nearly twice as high as those in firms with less efficient cultures. Denison’s study provides hard evidence that the cultural and behavioural aspect of organizations are intimately linked to both short-term and long-term survival.2

Many companies complain that their employees are not motivated, unproductive, and disloyal. Jeffrey Pfeffer, a business professor from Stanford University, and world leading expert in human resource strategy, argues that these companies get exactly what they deserve. If you create a “toxic” or dysfunctional work environment, you are going to get toxic behaviour from your employees. According to Pfeffer’s research, companies that manage people right will outperform companies that don’t by 30% to 40%.3

The top five performing stocks from 1972 to 1992 were Plenum Publishing (return of 15,689%), Circuit City (a video & appliance retailer; 16,410%), Tyson Foods (a poultry producer; 18,118%), Wal-Mart (19,807%), and Southwest Airlines (21,775%). Yet during this period, these industries as a whole performed very poorly. What these five extremely successful firms have in common is that their sustained advantage did not rely on technology, patents, or strategic proposition, but rather on how they managed their workforce.4

Three quarters of reengineering, total quality management, and downsizing efforts have failed entirely or have created problems serious enough that the survival of the organization was threatened. Most frequently citied reason for failure: a neglect of the organization’s culture.5

In a 1992 study by Coopers & Lybrand of 100 companies with failed or troubled mergers, 85% of the executives polled said that differences in management style and practices were the major problem.6

In 1996, the British Institute of Management surveyed executives involved in a number of acquisitions and concluded, “The major factor in failure was the underestimation of difficulties of merging two cultures.”7

Conclusion: culture needs to be debated and managed proactively, with great care and intensity, every bit as much as strategy and budgets.